Tax planning and anti-avoidance 

Josh and Maria have been a de facto couple for 3 years. Maria runs a profitable business providing coaching services. In the year ending 31 March 2021 she made a profit of $200,000. Josh runs an unsuccessful business of hobby farming. In the 2021 income year he made a loss of $80,000. Josh and Maria consider it wrong that Maria pays lots of tax while Josh accumulates large loss. Further, since 2017 Josh does Maria’s business accounts and tax returns for free, to save her the $10,000 she used to pay for accounting and tax services in the past. Therefore, they agreed that Josh will charge Maria a fee for doing her accounting work of $30,000 each year and there is no need for any payment to be made as the bank account is in their joint name. The effect of this agreement is that Maria’s business profits will be reduced by $30,000 each year, so that she will have net income of $170,000 per year, which ensures she only pays tax on the lower marginal tax rates and Josh’s loss will be reduced by $30,000 each year.

Required:

2.1 Advise Josh and Maria whether the agreement between them is void against the Commissioner by virtue of s BG 1 of the Income Tax Act 2007 and what the consequence would be. To support your advise you should follow the Commissioner’s suggested approach in IS 13/01 ‘Tax avoidance and the interpretation of sections BG 1 and GA 1of the Income Tax Act 2007’ (IS 13/01), and the Supreme Court decision in Ben Nevis v. CIR (Ben Nevis) and other relevant case law. 2.2 Also consider what (if any) shortfall penalties either Josh or Maria may be liable for. Include statutory authorities.

Answer rating: 100% (QA)

The agreement between Josh and Maria is void against the Commissioner by virtue of s BG 1 of the ... View the full answer